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City watchdog, the Financial Conduct Authority, will ban home and motor insurers raising prices over time for existing customers as it slammed the pricing techniques used to abuse loyal policyholders.
Known as the “loyalty penalty”, insurers entice customers with cheap premiums but then raise prices each year while offering new clients better rates. They raise prices more for those that are less likely to switch, the FCA found.
Instead, providers will have to offer existing customers the same terms as new ones. This means two drivers or homeowners of the same risk will pay the same regardless of their history with the insurer.
This could mean prices rise for savvy switchers who change provider each year to keep premiums costs down. It is possible insurers raise premiums across the board to compensate for the fact they can no longer overcharge loyal policyholders.
The FCA found new motor insurance customers pay on average £285 for their policy while customers who have been with their provider for more than five years pay £370. For building insurance, initial rates were £130 while loyal customers of five years paid £238.
Around 10 million home and motor insurance customers had been with their insurer for more than five years.
The report said insurers used “complex and opaque pricing” for renewing customers and that while some people shop around for a deal, many do not.
The FCA estimated the new policy would save consumers between £3.7bn and £11bn over the next 10 years – depending on price competition among providers – and would particularly benefit vulnerable customers. One in three customers overpaying for cover are classed as potentially vulnerable, such as being elderly or lacking financial knowledge.
Previously, the FCA found six million policyholders paid £1.2bn, or £200 each, more for home and motor insurance compared to if they had been charged the average premium.
James Blackham of By Miles, the pay-by-mile car insurance provider, said the news was a “huge win for British consumers”.
“The loyalty penalty takes advantage of time-poor, trusting and often vulnerable consumers.
"These measures, when in place, will finally offer consumers protection and will help restore trust, transparency and fairness to the insurance industry,” he said.
Christopher Woolard of the FCA said the “radical” changes would ensure firms cannot charge renewing customers more than new customers in future.
The FCA is seeking views on its proposals by 25 January 2021 with the new rules imposed next year.
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